“It is the dawn of the new age. The future of finance is here. We are veering towards a cashless society.”
Such proclamations are often made by finance pundits and observers. There is a war on cash playing out before our eyes the world over today. But, is this drive towards a cashless world really something we want? Will it be in public interest at this stage of our development in India? While few deny the benefits of the digital payments revolution, should we go at it unabashed? These are the questions this article seeks to answer.
THE SWEDES IN SWEDEN DO IT, THE ENGLISH IN ENGLAND DO IT
Cash is often seen as an obsolete, inefficient system of payment that only technologically backward people use. It’s totally uncool. As we get the option to use more and more payment solutions that do not rely on physical cash, the movement away from cash seems to be inevitable.
Many countries around the world are already making a definite move towards this futuristic cashless society. Sweden issued micro card readers to the homeless so they could accept donations from credit and debit cards. The Guardian reported that, according to the central bank of Sweden, cash transactions make up only 2% of the total value of all transactions in the economy. Buses in Sweden, as well as in London, stopped accepting cash as a form of payment some time back. Street vendors and even churches prefer donations that do not involve cash. Apart from card payments, which have been around for quite a while, most Western European and American societies are quickly moving to digital payments involving smartphones linked to a bank account.
Though India and a majority of developing countries are rather far from the scenario that Sweden finds itself in, there is constant support for a move towards a cashless society, which is amplified by innovations in the fintech space. The recently launched Unified Payments Interface (UPI) by the Reserve Bank of India (RBI), which uses Aadhar identification and one’s mobile number to make payments, is set to revolutionise payments systems in India. Waiting to take off into this seamless and modern payments world are new credit/debit cards, e-wallets and other mobile based payments (such as Airtel Money). The trends elsewhere in the developing world are largely similar (think of the m-pesa revolution).
IS A CASHLESS SOCIETY A SELF-FULFILLING PROPHECY?
Reducing the volume of cash transactions in a society surely has its advantages to any economy. Even a developing country like India can hugely benefit from reduced cash transactions and a move towards digital payments.
Interestingly, this “war on cash” is not driven purely by consumers’ desire to mitigate the inconvenience of carrying notes and coins. Instead, the war has highly powerful proponents backing it, and this is closely tied to the perceived advantages of a cashless society.
The most powerful drivers of the change are, unsurprisingly, those from the payments industry, such as credit card companies and banks. Every transaction that is done using cash is a missed opportunity for Visa and MasterCard to earn the transaction fee it charges. Thus, it is in their interest to showcase cash as redundant, inconvenient, and inefficient. As Brett Scott, author of The Heretic’s Guide to Global Finance: Hacking the Future of Money, masterfully points out in this article, the war on cash has a carefully orchestrated propaganda that involves projecting cash use as backward and out-of-sync with the modern world. Consider Visa’s campaign in Europe called “Cash free and Proud”, where cardholders can get liberated from the clutches of carrying cash. Elsewhere, in London, PayPal proclaims that “new money isn’t paper, it’s progress.”
The biggest tactic lies in creating a certain inevitability around the death of cash, such that there is a self-fulfilling prophecy.
Governments around the world want to desperately latch on to and realise benefits such as efficiency. Consider the biggest implication of eliminating big currency notes in a country like India. The amount of unaccounted (popularly referred to as black) money would have to inevitably reduce and the tax base would increase significantly. The huge amount of black money currently in existence in the economy and the geometric progression in its increase has been the centre of many mainstream national debates and its retrieval was also the subject of a pledge in Narendra Modi’s 2014 general elections manifesto. By eliminating cash, all transactions have to be linked to a bank account, which invariably makes it traceable by the income tax department.
Security is another big touted advantage of non-cash payments. Cash makes all illegal economic activities easier — from terrorist activities to petty criminals using cash to pay for drugs, because it cannot be traced. Also, counterfeit notes will have no place in a cashless economy.
Notwithstanding the aforementioned trends and advantages, many analysts still believe that the rumours about the death of cash are highly overstated. A deeper look into the vision painted on a golden canvas by the payments industry reveals uncomfortable implications of a cashless world. There are definite downsides to such a scenario and one must be acutely aware of these in order to mitigate them or put in place processes that can mitigate them beforehand.
IS CASH REALLY ALL THAT BAD?
Turns out, no. This is why:
The sheer logistical difficulty of getting everyone on board the cashless ship is itself a herculean task. The World Bank estimates that there are nearly two billion people in the world without a bank account. In India, the number of people without a bank account is about quarter of a billion. That’s a significant proportion of the global population to leave behind on this revolution. Even those who have a namesake bank account (those created during the Jan Dhan drive, for example) would prefer to use cash for most of their day-to-day transactions; 43 percent% of the accounts in India are, in fact, dormant accounts though there are attempts to change this. Consider this: as of April 2015, only 15% of adults in India reported using a bank account to make or receive payments (World Bank estimates).
In other words, any move that makes cash redundant would necessarily be going against a policy aimed at financial inclusion. If the lack of a bank account marginalises certain sections of the society who do not have access to these financial services, the move to a complete banking based transaction system will completely alienate them. While the banks want more account holders who will use their whole gamut of services actively, it cannot make profits out of the marginal user who would have to use a card to make low value payments.
It will also alienate a whole section of society that we often do not recognise and categorise them under a blanket term such as the shadow economy. The shadow economy is not just poor people, but those who may want a life outside the mainstream. As Scott eloquently puts it:
“So, good luck to you if you find yourself with only sporadic appearances in the official books of state, if you are a rural migrant without a recorded birthdate, identifiable parents, or an ID number. Sorry if you lack markers of stability, if you are a rogue traveller without permanent address, phone number or email. Apologies if you have no symbols of status, if you’re an informal economy hustler with no assets and low, inconsistent income. Condolences if you have no official stamps of approval from gatekeeper bodies, like university certificates or records of employment at a formal company. Goodbye if you have a poor record of engagements with recognised institutions, like a criminal record or a record of missed payments.”
Not all developed countries wish to go the Scandinavian route. Switzerland, that country which has been made infamous by Indian politicians for its stand on privacy and anonymity for financial asset management, is not too sold on the cashless idea. In fact, it is reintroducing its 1000 Swiss Franc bank note and according to the Bank for International Settlements, the number of card transactions is about a third of similar transactions in Canada and Great Britain. The main reason for the Swiss’ hesitance towards non-cash transactions is that of privacy. As noted in this article by Richard Giedroyc, the Swiss were not too keen on cashless train travel cards, as they had concerns that the government would snoop in on their travel habits.
Though this might sound like paranoia, there is something inherently icky about having every single transaction of ours recorded somewhere for eternity. Many people wouldn’t want their day-to-day transactions recorded forever. It is fundamentally uncomfortable to think that we are providing card companies and banks data about the microtexture of our economic life.
The data can be used individually or in an aggregated manner, but neither of the scenarios is comforting to think about. Joe wouldn’t want his bank to know how many times he drinks in a month, number of packets of cigarettes he buys or which porn sites he visits and pays for. And these are not one-time transactions. Imagine a scenario where every single financial transaction one has undertaken since the age of 18 is recorded and attached to a person’s permanent ID (Aadhar or other social security numbers).
Then, there is the serious matter of censoring. Not only can banks and card companies see what you are spending on, but also, if need be, can censor your transactions, either voluntarily or under force from an authoritarian regime. Quite unfortunately, this is not empty Orwellian dystopian writing, but has already seen precedent in the world. Uganda, in February 2016, shut down the popular mobile money, along with access to social media, during its elections. The fear was that the opposition could use the mobile money networks to pay voters. However, certain analysts insist that the real reason was to block donations to the opposition party. In another instance, Bank of America, VISA, MasterCard, PayPal and Western Union made an arbitrary and seemingly unlawful blockade on donations to the Wikileaks page, which has seen its revenue dip by over 95%.
Without proper safeguards, any government can potentially implement authoritarian policies with extreme ease by blocking financial flows. If a state decides to impose prohibition or ban the purchase of certain other goods, all it would need to do is blacklist vendors that sell the particular product or service. Or, introduce friction to hamper purchases.
4. MACROECONOMIC MANIPULATION
There are also bigger macroeconomic considerations, both monetary and fiscal, that propel governments to encourage the abandoning of cash, which might not altogether be in the average citizen’s interests. In crisis-stricken and deflationary economies of Europe, it is imperative that the majority of wealth is stored in bank accounts. When the economy is in slack, the last thing that governments want is for its citizens to save. They want people to either spend or invest their money as much as possible. This behaviour can be induced if a large part of people’s income is directly linked to the banking system. In a bizarre economic climate such as the one that Europe is facing, central banks have pushed interest rates to zero and in fact, to negative territory. Under such circumstances, most people would rather keep their money in the form of cash, rather than in the banks.
However, in a truly cashless society, “by forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees)”, says Erico Matias Tavares of Sinclair & Co. This can boost consumption, investment, inflation, and GDP in the short run. This can explain why the Federal Reserve and the European Central Bank are cheerleaders for the transition to a cashless society. It just makes their monetary policies exponentially more effective.
A cashless society is really a mixed bag for fiscal policy. The government will also lose its seignorage privileges (profits made by a government while printing currency – essentially, the difference between the costs of printing or minting currency and its face value).
5. THEN THERE’S NATIONAL DEBT
Countries, throughout history, have printed notes in order to get out of extreme debt, or as in the case of Japan, to induce inflation in the economy. With a digital economy, this would become harder, if not impossible. The only possible tool that the government will have to increase the money supply in the economy would be to issue bonds and bills, which will increase its debt obligations. While this move will keep governments in check and prevent them from excessive printing of cash, which can lead to hyperinflationary episodes, it also removes a vital tool from the government’s armoury to combat severe deflationary trends, like the one we see in Japan.
6. CITIZENS CAN’T DO A BANK RUN DURING ECONOMIC CRISES
Finally, cash is an important safeguard against economic volatility. At times of distress, when the confidence in the banking system erodes, citizens are likely to withdraw cash in large numbers and hold it in its physical form. This is known as a bank run and has occurred periodically in modern financial history. Though bank runs are destabilising and should be avoided to prevent a banking collapse in the macro scenario, at the individual level, a cashless society eliminates the possibility for an individual to safeguard her own savings. As Stefan Wieler points out in this insightful article: “Eliminating the ability of savers to withdraw cash from a bank could create increased moral hazard among banks. After all, if they all act the same, there would be no risk for a bank run anymore because there is no place to hide for savers. The sorts of banking practices that contributed to the 2008-09 global financial crisis would become all the more likely were cash to be banned outright”.
On balance, there seems to be an optimal mix of digital payments and cash that should be in existence in an economy to stave off the dystopian consequences of a cashless society, while simultaneously maximising on the efficiency benefits that cashless transactions can provide. We should not get carried away by the visions of a cashless society and proceed with caution.